U.S. Treasury cautions Bitcoin businesses on legal duties

Some of Bitcoin enthusiast Mike Caldwell's coins in this photo illustration at his office in Sandy, Utah, September 17, 2013. REUTERS/Jim Urquhart

ST. LOUIS (Reuters) - The U.S. Treasury Department’s anti money-laundering unit is warning businesses linked to the digital currency Bitcoin that they may have to comply with federal law and regulation as money transmitters, a Treasury spokesman said.

Bitcoin, which unlike conventional money is bought and sold on a peer-to-peer network independent of any central authority, has grown popular among users who lack faith in the established banking system. It has also raised concerns among law-enforcement authorities that digital currencies could be used for laundering money.

The letters have had a “chilling effect” on Bitcoin businesses, which are intimidated by the threat of civil and criminal sanctions for non-compliance, said Jon Matonis, executive director of the Bitcoin Foundation, an advocacy group. The firms, he said, may effectively be “put out of business in an extrajudicial manner.”

Brad Jacobsen, a lawyer representing one Bitcoin businessman who received a letter from FinCEN, said his client has chosen to suspend his business activity “while state and federal compliance matters are considered and/or appropriate exemptions are determined.”

FinCEN’s letters, which ask recipients for more information about their business models, put the firms on notice that there is a legal “gray area,” so they are “better off to err on the side of caution” and comply with FinCEN’s rules, Matonis said.

Certain Bitcoin businesses came under FinCEN regulation in March when the Treasury bureau issued guidance defining some players in the digital currency industry as money transmitters.

For more than a decade the money-transmission industry, which includes firms such as Western Union and PayPal, has been required to enact anti-money laundering controls, report suspicious activity, register with FinCEN and obtain state licenses.

These steps are required to comply with the Bank Secrecy Act, the main anti-money laundering statute, and avoid running afoul of a federal law that bans unlicensed money transmitters.

While some Bitcoin businesses reject FinCEN’s assertion that they are money transmitters, a number have still registered with the agency, a search of the Treasury bureau’s website shows.

FinCEN sent letters to Bitcoin-related businesses on the Internet that appeared to fall under its definition of money transmitters but had not registered, Hudak said. He said FinCEN will keep sending letters to unregistered Bitcoin businesses.

“As we come across them, and as people tip us off, we’ll make inquiries. That is part of what we do,” Hudak said.

PUTTING BUSINESSES ON HOLD

Mike Caldwell, who runs a business out of his Utah home that accepts digital bitcoins from customers and turns them into metal coins that hold the “private key” needed to redeem the currency, received one of FinCEN’s letters, as first reported by the online publication Wired.

Jacobsen, Caldwell’s lawyer, told Compliance Complete that “out of an abundance of caution” Caldwell’s business, Casascius LLC, reacted to the letter by registering with FinCEN and suspending business activity.

“Laws and regulations related to virtual currencies are in a state of flux and we are working to determine how to appropriately comply with any that are applicable to our client. Casascius LLC is committed to furthering the use and acceptance of Bitcoins but is also committed to complying with applicable law,” Jacobsen said.

The identities of the other recipients of FinCEN’s letters are not known.

NEW ENFORCEMENT PRECEDENT

A legal expert with years of experience representing digital currency firms said FinCEN seemed to be establishing a new regulatory enforcement precedent by warning individual businesses of compliance obligations before taking action.

“Is this setting a new standard that in the future if there are any questionable business models there will be notice given before any action is taken?” said Carol Van Cleef, a partner with the Washington law firm Patton Boggs LLP.

In response, Hudak said the letters are an attempt at gathering information. He likened them to the letters that banks sometimes send to customers seeking information about the customer’s transactions in an effort to determine whether suspect transactions are truly linked to illicit activity.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (bit.ly/16Ebxub) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)